Strategy

In 2016 the Company entered into a 25-year Rehabilitation, Exploration, Development and Production Sharing Agreement (REDPSA) with SOCAR (State Oil Company of the Azerbaijan Republic) for the largest onshore oilfield in the country. The 2P reserves of the field have been independently assessed at 32.1 million barrels of oil (CPR March 2017), with an approximate net present value discounted at 10% of US$435 million.

The Board of Directors views Azerbaijan as a very reliable jurisdiction in which to do business and as the ideal springboard for the Company’s successful expansion. Azerbaijan occupies a strategic geographical position at the crossroads between the East and West, and is the world’s oldest oil and gas producing country with the first commercial production of oil recorded in 1834. Since independence in 1991, Azerbaijan’s energy strategy has centred on the Caspian Sea with a series of highly successful production sharing agreements with international oil majors such as BP, ExxonMobil, Lukoil and Statoil among others.

Zenith’s 2016 Azerbaijan acquisition has been a turning point for the Company and I am fully confident that it will prove transformational. Current production averages approximately 350 BOPD and historical production once averaged 15,000 BOPD during the Soviet Union period after oil extraction first began in 1971.

The decline in production to current levels is the result of a series of cumulative mechanical failures that have over time affected a number of wells across the field, following a lack of sustained investment in field infrastructure. To be sure, it is a complex field with deep wells presenting a series of geological and technical challenges, but at the same time, as indicated by its very significant 2P reserves of 32.1 million barrels of oil, the field has enormous production potential.

One of Zenith’s defining traits is its low-cost structure and strong fundamentals, supported by low-cost profitable energy production activities. The Board of Directors recognises the dangers presented by imprudent cost undertakings and will always seek to implement the most cost-effective solutions to achieve its objectives. More specifically, we prefer to use our own internal resources and personnel to the greatest extent, and thereby avoid using costly third-party service companies whenever possible. To this end, Zenith has announced that it is finalising the order of a 140-tonne, latest generation workover rig capable of performing sidetracks, and carrying out well completion in newly drilled wells once the Company’s drilling programme commences. The progressive arrival of new, latest generation oil production equipment will significantly enhance our operational capabilities, as well as substantially decreasing our operational expenditure.

The Company has also announced that it is negotiating the acquisition of a new, latest generation drilling rig for its development drilling programme scheduled to begin in 2018. Operating our own drilling rig will be a game changer by providing unparalleled operational independence and significantly reducing drilling expenses. This will enable the Company to drill new wells systematically and mitigate the risk of unsuccessful drilling activities.

The rehabilitation and development of our Azerbaijan acquisition is the Company’s primary focus. I am confident that the use of modern production techniques and new equipment will significantly increase production, especially as some very promising sectors of the REDPSA area, specifically Zardab, have been left untouched for the past twenty years.

It is important to emphasise that Zenith is not a ‘make or break’ energy exploration venture whose existence is predicated on uncertain, speculative exploration activities. Zenith is a profitable energy production company with a diversified portfolio, generating revenue each month. This significantly de-risks the Company when compared to many other junior listed energy companies who lack productive, cash-generative assets.

The energy sector has undergone a period of transition with many companies overcome by insurmountable levels of debt and unable to perform in a low-price oil environment. We view the current market environment as an ideal context for counter-cyclical expansion opportunities, especially for companies that have strategic vision, adequate funding and a strong adaptable operational skillset.

The Board of Directors, some of whom founded Zenith and are significant shareholders in the capital of the Company, recognises the fact that ambitious objectives require appropriate funding. The Company will always seek to achieve the appropriate funding to support its operational objectives, whilst seeking to avoid undesirable equity dilution. Indeed, Zenith has a small number of shares in issue compared to other listed energy companies of our size.

Zenith will actively look for any value-accretive opportunities to further strengthen and diversify its asset portfolio, including the possible acquisition of a renewable energy production activity.

I am determined for Zenith to succeed by fulfilling its vast development potential. I greatly look forward to the journey ahead.

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